Dow Resilient As Jobless Claims & GDP Disappoint

Another week, another set of miserable employment data. Initial jobless claims came in at more than 2.1 million, taking the total number of U.S. layoffs since the pandemic began to roughly 40 million.

There was also a downward revision to the Q1 GDP result, which fell to -5.0% in an entirely predictable adjustment for the quarter.

Given that JPMorgan predicted a 10% contraction, there will still be some on Wall Street that view this as better than anticipated. But with the worst of the damage coming in Q2, the upcoming release is likely to be far more significant than today’s data.

The Dow Jones scored its third straight daily gain on Thursday.

Awful economic data releases continue to create no headwinds for a buoyant U.S. stock market.

Dow bulls are banking on a big third quarter, with little margin for error.

Dow Resilient As Jobless Claims & GDP Disappoint

Another week, another set of miserable employment data. Initial jobless claims came in at more than 2.1 million, taking the total number of U.S. layoffs since the pandemic began to roughly 40 million.

There was also a downward revision to the Q1 GDP result, which fell to -5.0% in an entirely predictable adjustment for the quarter.

Given that JPMorgan predicted a 10% contraction, there will still be some on Wall Street that view this as better than anticipated. But with the worst of the damage coming in Q2, the upcoming release is likely to be far more significant than today’s data.

Overall investors continue to look beyond the second quarter, hoping for growing signs of a rebound in the third quarter and a full-blown upturn in the final three months of the year.

Such hopes could be dreadfully misplaced however given the long-term hits to activity, employment and spending, and with equities continuing to recover the lost ground of February and March there is precious little room for disappointment.

Dow 30 Stocks: Apple & Boeing Lead The Rally

The Dow 30 enjoyed another strong day of trade on Thursday, as broad momentum carried the index higher once again.

Apple posted a 1% rally as investors continued to discredit any worries over tensions between the United States and China.

Boeing stock rallied 1.1%. The recovery comes in the wake of massive layoffs, but with the production of the 737 MAX back underway and the money rolling in from defense contracts, investors think the aerospace giant has what it takes to weather the storm.

Disney stock came under pressure following a rating downgrade, and it was the worst-performing stock in the Dow with a loss of 3.5%.

Mark Zuckerberg is now the third richest person on the planet as shares of Facebook (NASDAQ:FB) print fresh all-time highs. The Facebook CEO has overtaken legendary investor Warren Buffett amid reports that the social media giant is creating a more divisive world.

The difference in net worth is largely due to Facebook outpacing Berkshire Hathaway’s stock, as the fortunes of both chief executives entangled with their companies. Mark Zuckerberg owns 13% of Facebook while the Buffett owns 16% of Berkshire.

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At some point, the stock market has to reflect the reality of the U.S. economy.

The quick recovery many are banking on isn’t going to materialize.

At the start of May, the stock market got some great news: the recession is over. Economists at both Goldman Sachs and Morgan Stanley called the bottom of the U.S.’ economic decline.

But contrary to what many Donald Trump supporters and internet trolls believe, the economy isn’t the same as the stock market, though the two are somewhat intertwined.

Perhaps part of the reason the stock market is trading so out of sync with economic warnings is a lack of understanding. | Source: CCN

Eventually, the stock market has to reflect the overall economy. The reason it doesn’t right now is that most investors are betting on a sharp, fast recovery. So the question of whether the stock market can hold its gains depends heavily on how long we bump along this desolate bottom.

The Stock Market Can’t Climb Until The Economy Does

Despite the reopening of economies around the world, it’s probably going to take years to get back to where we were at the start of 2020. The University of Chicago’s Becker Friedman Institute believes that many of the jobs lost in the pandemic won’t return—11.6 million of them, to be exact.

That’s mainly because of the massive shift in the global economy that coronavirus has accelerated. A good example is in retail, where brick-and-mortar department stores had already become relics from the time before e-commerce. Now, they’ve been forced to sink or swim as foot traffic has shut down completely. They’re mainly sinking.

The U.S. economy is about to be littered with the remains of failed businesses | Image: AP Photo/Andrew Harnik, File

It’s happening in other aspects of the economy as well—businesses are restructuring, cutting jobs, changing the way they operate, and allowing employees to work from home. There’ll be less travel and, therefore, fewer pilots, cabin crew, and check-in agents. There’ll be fewer planes, and as such fewer engineers who build and maintain them. The list goes on and on.

Leading Indicators Show More Economic Pain Ahead

Trailer orders are down 98%, suggesting U.S. businesses see more pain ahead. |Source: Business Insider

It would be easy to point to the fact that April was full of uncertainty, and the country-wide lockdowns impacted those numbers. But what’s important is that the data are a leading indicator—the orders aren’t for April, they’re placed in April for future use

The sharp recovery the stock market is banking on isn’t the same one businesses around the country are planning for.

Even Social Distancing Stocks Need The Economy

Some investors are taking comfort in “quarantine stocks.” Cornell Capital Group created its index to track the basket of stocks that will thrive in quarantine. It includes the likes of Amazon (NASDAQ:AMZN) and Zoom (NASDAQ:ZM), whose businesses are seen benefitting from social distancing measures.

At some point, even the stocks that benefit from isolation measures are going to need the economy to pick up to continue delivering growth. | Source: Cornell Capital

But the tailwinds that quarantine offers will eventually fade as the economy’s dire situation becomes more clear. Sure, online collaboration tools like Zoom are having a moment in the sun as businesses adapt to the pandemic. Still, Zoom is no different than other companies trading on the stock market. It needs a strong economy to continue growing.

Zoom needs businesses to stay in business. Amazon needs people to spend money to support its e-commerce business. It needs other companies to invest in its cloud computing platform. Facebook (NASDAQ:FB), another supposed beneficiary of prolonged social distancing, needs other firms to spend on advertising.

The writing is in the sand. Countless execs, including Amazon’s Jeff Bezos, have warned of the pain ahead. But still, the market keeps marching ever higher. At some point, the house of cards will topple.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of WaheedCh.com. The author holds no investment position in any of the aforementioned securities at the time of writing.